An island of growth in a stagnant sea

The economic news on the Philippines the last few weeks has been good. The country’s Gross Domestic Product (GDP) growth rate for the first semester was an impressive 6.1 per cent, which put it in the top tier in Asia, while its “competiveness” leaped 10 notches, to the 65th from the 75th spot, out of 144 countries rated by the World Economic Forum. Most other indicators appear to be pointing in a positive direction.

In the opinion of many economic commentators, what is mainly responsible for the positive economic climate are infrastructure spending, which was restrained in the first two years as the contracting process was cleaned up at the Department of Public Works and Highways, and the anti-corruption program of the Aquino administration. Also instrumental in the view of some has been the Conditional Cash Transfer (CCT) program of the Department of Social Welfare and Development, which has raised the purchasing power of millions of households.

The country’s performance was in marked contrast to the center economies. The US recovery has stalled, while most of Europe is plunging into recession owing to savage austerity programs that have been demanded by Germany and key European institutions from highly indebted countries.

With two engines virtually knocked out, the global economy has been running on one motor in the last three years, and that is the so-called emerging economies. Now that motor is faltering, and this will have an impact on the Philippines.

BRICs in trouble

In 2010 and early 2011, East Asia and the big “newly emerging economies” known as the “BRICs” (Brazil, Russia, India, China, South Africa) were regarded as bright spots in the global economy, exhibiting resiliency and growth even as the North stagnated. Indeed, to economists like Nobel laureate Michael Spence, “With growth returning to pre-2008 levels, the breakout performance of China, India, and Brazil are important engines of expansion for today’s global economy.” In a decade, the share of global GDP by the emerging economies would pass the 50 per cent mark, he predicted. Much of this growth would stem from “endogenous domestic-growth drivers in emerging economies, anchored by an expanding middle class.” Moreover, as trade among the BRICs increased, the future of emerging economies is one of reduced dependence on industrial-country demand.”

That was wishful thinking. 2012 seems to be the year the emerging economies will yield to the turbulent waves emanating from the sinking economies of the North. Economies have been slowing down, with India’s growth 2011 falling by five per cent relative to 2010. Brazil’s GDP growth was under three per cent—lower, as the Economist noted, than sickly Japan’s. China’s first quarter growth in 2012 plunged to 8.1 per cent, its slowest pace in three years. The main reason appears to be the continued great dependence of these economies on Northern markets and their inability to institutionalize domestic demand as the key engine of the economy.

China downshifts

Being the world’s second largest economy, China’s downshifting was particularly alarming. Like so many other Western Pacific countries, the Philippines has been absorbed into a greater East Asian economy centered on China. In 2008, in response to the crisis, China launched a $585 billion stimulus program to enable the domestic market to make up for the loss of export demand. Owing to Chinese demand, the Philippines and other Southeast Asian countries were able to emerge from the downturn provoked by the global financial crisis in 2010.

Achieving some success at first, China, however, reverted back to export-led growth oriented towards the US and European markets. The reason for the retreat was explained by the respected Chinese technocrat Yu Yong Ding: “Unfortunately, with a large export sector that employs scores of millions of workers, this dependence has become structural. That means reducing China’s trade dependency and trade surplus is much more than a matter of adjusting macroeconomic policy.”

In other words, the retreat back to export-led growth, rather than being merely a case of structural dependency, reflected a set of interests from the reform period that, as Yu put it, “have morphed into vested interests, which are fighting hard to protect what they have.” The export lobby, which brings together private entrepreneurs, state enterprise managers, foreign investors, and government technocrats, remains the strongest lobby in Beijing. Owing to the inability to shake off the country’s dependence on export-led growth, China’s “growth pattern has now almost exhausted its potential.”

Crisis and opportunity for the Philippines

The US, Europe, Japan, and China account for close to 55 per cent of Philippine exports, which means that there is no way the country can escape the effects of the global downturn, which most economists now feel will last for a long time. The Nobel laureate Paul Krugman, indeed, calls the economic situation in Europe and the United States a “depression.” We can, however, mitigate it by ramping up the dynamism of our domestic economy. The rise in GDP for the second semester is, in fact, due mainly to local demand brought about by the delayed spending on infrastructure and CCT spending, which countered the decline in exports over the last year.

With globalization in retreat, however, we can no longer look at stimulating domestic demand as a strategy that only kicks in when exports fall. With international trade likely to remain flat far into the future, strategic economic rethinking is now imperative. The export-oriented strategy of growth that our country, like China, has essentially followed over the last four decades is obsolete.

This will mean, among other things, planning, or making a conscious choice which sectors will serve as the leading edge of the economy, radically raising investment as a percentage of GDP, and a program of asset and income redistribution, including the completion of land reform. Because inequality keeps many people out of the market, with little effective demand, it is a drag on growth. Export-oriented growth was, in the past, a way to avoid stagnation without having to seriously address the deep chasm between rich and poor. With a stagnant international economy throwing us back to the domestic market as a source of growth, this will not longer be possible. And with environmental constraints like climate change mounting, more egalitarian distribution of income will be necessary for society to live with lower economic growth rates.

In sum, global bust may, ironically, provide the necessary conditions for the profound restructuring that our economy has long needed, but we have to seize the opportunity.